Is the collapse of Wanda-DCP deal heralding the end of Chinese Investments in Hollywood?

Husam Sam Asi

2 years ago

Wanda’s boss, Wang Jianlin

Last Friday, Dick Clark Productions (DCP)’s owners, Eldridge Industries, issued a statement confirming the termination of its sale to Chinese conglomerate Wanda, saying that “Wanda failed to honor its contractual obligations, and that it was legally demanding the release of $25 million deposit to which it is contractually entitled given Wanda’s failure to consummate the sale. Wanda has already paid $25 million for delaying closing the deal to February.

The one billion dollar deal caused a storm when it was announced last November, igniting a debate about Chinese companies’ acquisitions of Hollywood entities and raising alarms in Washington, where lawmakers were beginning to question the Chinese companies’ motives, particularly Wanda’s, behind those large-scale buyouts, suspecting that they were a subterfuge by the Chinese Government to infiltrate the US media and dominate its culture.

Well, Washington needs not to worry anymore. The Chinese authorities themselves are curbing their companies investments overseas in an effort to limit capital flight, after witnessing a depletion of its capital reserves, which has dropped below $3 trillion this year – $220 billion dollars were spent last year on overseas purchases by Chinese companies.

One of the casualties of these new restrictions was the purchase of Voltage productions, the producers of Oscar-winner The Hurt Locker, by Anhui Xinke New Materials. The $350 million deal was aborted last December. The acquisition of The MGM studio by several Chinese entities was also halted.

The fate of other deals is now also in doubt. There was little excitement last month in Hollywood when China’s Recon Holding signed a deal to buy 51% of Millennium Films, which was behind The Expendables and Olympus Has Fallen, for $100 million. Sources in China and Hollywood are skeptical about the prospect of closing this deal, given the new circumstances.

In the last few years, Chinese companies invaded Hollywood like a tsunami, pouring billion of dollars on whatever they can get their hands on. They seemed unstoppable; if they couldn’t buy a company, they signed a partnership with it. And while Washington was raising alarm bells, Hollywood was happy to cash in. So is the party over?

“I predicted that,” boasts a marketing executive, who had worked on Hollywood-Chinese projects. “Over the years, Hollywood has fleeced money from the Germans, the Japanese, the Arabs and Indians. Once they run out of their money, they leave empty handed, and Hollywood waits for the next golden cow. Bear in mind that Hollywood is like a casino. No one makes money other than the owner. For the Chinese to wake up to this reality was not a matter of If, but a matter of When. There was no way they could sustain this momentum of wild expenditure.”

The pressing question is: How will Hollywood be affected by shutting off this stream of easy money?

Actually, Hollywood is not really keen on selling its properties to Chinese companies. Case in point, Wanda’s attempts to purchase one of the 6 big studios have so far been resisted and rebuffed. Last summer, Paramount’s owners rejected their offer of $5 billion dollars to acquire 49% of the studio. “Hollywood doesn’t need Chinese money; it has too much money on offer from Hedge funds, but it needs the Chinese market,” The marketing executive tells me.

Since foreign entities can’t do business in China, Hollywood companies are left with no choice but to form partnerships with Chinese counterparts in order to access the world’s second largest market and circumvent stifling regulations imposed by authorities there, such as the film quota that limits imported movies to China to 34 per year. Ideally, Hollywood studios prefer to have a foothold in China that enables them to market and sell their products on their own, but that is not going to happen any time soon. Therefore, they will continue to seek out alliances with Chinese companies.

At the same time, Hollywood is fully aware that China needs its products as much as it covets its market. “They don’t have the production infrastructure to fulfill the demand of their market. . They need our movies in order to fill out the thousands of theatres they are building,” a studio executive tells me.

It’s not a secret that China is keen on exploiting the soft power of media and entertainment to expand its influence around the world. But it can’t achieve that without a thriving market of its own and a production infrastructure to feed it. For that, it requires the might and expertise of Hollywood studios, which have tentacles all over the world and can produce highly-profitable spectacles. Hence, mounting obstacles before Chinese companies’ attempts to purchase Hollywood entities will just jeopardise the authorities ambitions.

“The Chinese authorities are not blocking legitimate deals made by bona fide media companies,” a Hollywood consultant with Chinese connections tells me. “They are only going after companies, from outside the media business, who are buying out US companies.”

Apparently, the Chinese authorities are suspicious of those companies’ motives. Are their acquisition activities a subterfuge to move assets out of China? Anhui Xinke New Materials, for instance, specializes in copper and Recon Holding manufactures industrial wires and cables.

Granted, investing in the film business is a very risky endeavour, and without understanding it, those companies would be throwing money down the drain – money that the Chinese government would rather keep at home to prop up its depreciating Yuan, which dropped 7% against the dollar last year. But that doesn’t explain blocking the Wanda-DCP deal because Wanda is a bona-fide media company, owning the world’s largest cinema theatre chains such as AMC and Odean, and Legendary Productions and Wanda Studios in Qindgao.

Very few people in Hollywood believe that the authorities were behind blocking the DCP deal. “Wanda realized that it made a bad deal and wanted to get out of it, and the new regulations provided them the excuse to do so,” tells me the consultant, who also points out that Wanda has ample liquid assets outside of China that could’ve been used to pay for the DCP deal, had they wanted to do so.

If this is the case, then Wanda is contradicting its declared ambitions of buying Hollywood assets and expanding its influence there. Just a couple of months ago, its boss, Wang Jianlin, urged Donald Trump not to block Chinese investments in the US, at the World Economic Forum in Davos. He also said that his company had earmarked $5Bn-$10Bn per year for overseas investment with the U.S. the top priority. So there must be a very compelling reason for him to put his reputation and credibility on the line and pay $50 million in fees in order to cancel one deal. So what could be the motive behind his decision?

As mentioned above, many enthusiastic investors have come to Hollywood expecting great fortune, but they get cold feet when their losses start to mount and exit the game. Legendary Productions, which cost Wanda $3.5 billion last year, had declared $500 million losses before it had to write off another $75 million to cover for the disappointing intake of “The Great Wall” at the box office. Wanda’s itself saw its revenue dropping 14% in 2016. That was the company’s first decline in more than a decade and exceeded its forecast for 12% loss. Meanwhile, the value of shares in its Wanda Cinema Line exhibition chain has fallen more than 29% during the past 12 months.

These losses must’ve been a wake-up call for Wanda’s executives and a reason for a contemplative pause: is it wise to pay for a TV production company, like DCP, $1 billion when its real worth, according to experts, shouldn’t exceed $300 million?

Some suggested that Wanda had rushed into the deal without doing proper due diligence. They had falsely assumed that DCP was the owner of the popular film awards show, The Golden Globes, when in fact, it was merely contracted to produce it for a limited period. Losing the Golden Globes contract would be a massive blow to the company, something that Wanda can’t afford anymore, given that its other media acquisitions are hemorrhaging cash.

Another plausible reason for Wanda to exit this deal is the uncertainty that has been borne out of Donald Trump’s arrival into the White House. Although Trump has cooled down his anti-China rhetoric, his two appointees, Robert Lighthizer and Peter Navarro, to work with Beijing on trade and business relations are vehement China critics. Hence, no one can predict the outcome of these negotiations, which will have a powerful financial impact on all deals.

Nonetheless, the US and Chinese markets are so interdependent now that one will suffer greatly without the other. Wang didn’t promise to invest billions of dollars on media acquisitions in order to impress the audience in Davos, but rather because he has to do so for the sake of his own business. He owns nearly 20% of the world cinema theatres and is constructing one of the world’s largest studios. He can either remain at the mercy of Hollywood to provide him movies for his theatres and projects to shoot in his expansive studios or gain independence by acquiring his own Hollywood production companies to achieve that. He clearly prefers the latter option.

The Entertainment business is a fickle one, but it’s as alluring as its stars. Investors are easily lured into it, but many leave it with empty pockets. It’s not uncommon for Hollywood studios to suffer massive losses and face bankruptcies. This is a reality that is evidently dawning on Mr. Wang. I doubt seeing him rushing into a new Hollywood adventure in the near future, but he will definitely come back when the air clears up.